The Operational Conundrum of Acquisition Financing

Posted on: September 26th, 2023

acquisition-financing

The independent sponsor community has a varied underlying skill set including disciplines such as finance, consulting, sales and entrepreneurism. Above all, the talented independent sponsor is a dealmaker and acquisition financing closer first and foremost. The ability to source a deal and close acquisition financing is no doubt an impressive skill. It takes high degree of credibility and trust to get a seller and acquisition financing lender to buy into your deal. Landing deals amidst a crowded market takes a special skill in articulation, persuasion and organization not unlike a high-powered salesperson engaged in big ticket system sales.

Once the acquisition financing is closed, and the new buyer is in charge, the requirements for success change dramatically and become intensely operational. The key differentiator in winning the deal, your ability to articulate and sell your philosophy, has little impact on your ability to add value to the operational side of the company. This is the operational conundrum inherent in acquisition financing. Expert salesmanship wins the deal, yet operational experience and the ability to expand the business wins the return. Smart sponsors through their failed deals may have learned this lesson. Many people confuse the ability to analyze and think high level with the ability to actually run a business.

Ultimately, the strongest acquirers are those with relevant industry experience and strong operational expertise who have previously been in the trenches and know the intricacies. They usually bring new resources and strong teams of people to their new acquisitions, that catalyze new forms of growth. Acquisition financing lenders are keenly focused on vetting the operational bona fides of the teams they fund. Buyers with strong operational chops usually are versed in under promising and overdelivering. They have a strong grasp on timing factors and capital requirements needed to perform in line with the growth plan. Unlike equity groups build on high level salesmanship, these operational teams have a business level perspective that allows them to think at the grass roots level necessary for business expansion success.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.